Central banks are deadly fearful of deflation. That’s why the Federal Reserve, the European Central Bank, the Bank of Canada, the Bank of Japan and Sweden's Riksbank, among others, have 2 percent inflation targets. They don’t love rising prices, but they worry about the consequences of a general decline in consumer prices, so they want a firebreak. Unfortunately, they seem powerless to meet their targets in the current economic environment.DYI Comment: Central banks are nothing more than banking cartels who price fix interest rates for their members. The reason they fear deflation individuals and corporations will begin paying off loans as opposed to "rolling them over." If deflation is severe defaults will leap and the banks will lose their entire investment(loans). So...Central banks will lean to the direction of inflation and attempt to maintain debasement at a low level. Have they been successful?
No matter how much lipstick you put on this pig, it still is a pig. A complete and utter failure.
The guardians of monetary policy are riveted by Japan, where consumer prices have declined in 48 of the last 83 quarters. This pattern of deflation long ago convinced Japanese buyers to hold off purchases in anticipation of lower prices. But the result is excess inventories and too much productive capacity, which force prices even lower. That confirms expectations, resulting in yet more buyer restraint. The result of this deflationary spiral has been a miserable economy with an average growth in real gross domestic product of just 0.8 percent at annual rates since the beginning of 1994.
Central banks also fret that in a deflationary environment, debt burdens remain fixed in nominal terms, but the ability to service them drops along with falling nominal incomes and waning corporate cash flows. So bankruptcies leap, while borrowing, consumer spending and capital investment all weaken.DUI Comments: Bankruptcies leap along with weakened consumer spending and capital spending. But NOT forever. If this was allowed to run its course consumer debt would go back to a low level to where individuals would save for their larger purchases. Of course this would "cut out" of the loop bankers as individuals self fund the majority of their purchases. With continued deflation corporations would deleverage moving to a self funding model as well. This would "cut out" the bankers for very large interest earnings. Central banks who work for the banks(not the other way around) maintain interest rates below the rate of inflation in order to induce borrowings and away from self funding.
As I argued on Monday, deflation remains a clear and present danger. Worryingly, the remedies central bankers are using aren’t working. First, in reaction to the financial crisis, they knocked their short-term reference rates down to essentially zero, and bailed out their stricken banks and other financial institutions. That may have forestalled financial collapse but it did little to stimulate borrowing, spending, capital investment and economic activity. Creditworthy borrowers already had ample liquidity and few attractive spending and investment outlets; slashing borrowing costs to record lows stimulated asset prices such as equities, with little economic benefit.
Furthermore, banks were too scared to lend. And as they resisted attempts to break them up and eliminate the too-big-to-fail problem, regulators bereaved them of profitable activities such as proprietary trading and building and selling complex derivatives. That forced them back toward less lucrative traditional spread lending -- borrowing short-term money cheaply and lending it for longer at a profit -- just as the shrinking gap between short- and long-term funds made that business even less attractive. With the amount of capital banks are obliged to set aside against their trading activities also leaping, they're now regulated to such an extent that many of them probably wish they had been broken up.DYI Comment: One of the few good things to come out the new regulations is the beginnings of a dividing wall between investment banks and commercial banks. Congress needs to bring back the Glass - Steagal act in its entirety. Placing commercial banks back to boring spread lending business as the banks operate in a similar fashion as REIT's paying out a large proportion of their earning in dividends.
For their next move, central banks introduced quantitative easing, purchasing massive amounts of government debt and other securities. As the Fed bought trillions of dollars’ worth, the sellers plowed much of the proceeds into equities. That hyped stocks but didn’t induce economic growth (equities are primarily owned by rich folk who don’t spend much more on goods and services as their portfolio values rise).
The Fed called a halt to QE in October 2014; but the ECB and the Bank of Japan are still extending their programs, and have turned to negative interest rates out of desperation. They know full well that borrowing costs at or below the so-called zero bound cause multiple financial distortions as investors’ zeal for yield drives them into hedge funds, private equity, junk bonds, emerging-market equities and debt and other risky asses. But they're praying that negative rates will spur investment and spending as borrowers, in real terms, are paid to take the filthy lucre away. Against a deflationary backdrop, nominal rates must be even more negative than the rate of consumer price declines to create negative real rates.DYI Comments: Negative rates as a desperate move to keep the party going for the banks. No self funding permitted by saving cash(to avoid negative rates) countries are now moving to ban currency. A blatant and brazen attempt to force individuals and eventually corporations to use banks for all transactions. Loss of freedom and continued bank profits all by government edict.
Central banks have tried almost everything, but in the current deflationary climate monetary policy is impotent and policy makers are proving the ineffectiveness of pushing on a string. That's good news for Treasuries and the dollar, but bad news for equities and commodities.DYI Comments: Good news for Treasuries (and high quality corp. bonds). If this deflationary backdrop continues Gary Shilling will be correct. However here at DYI bond rates are so low historically our weighted averaging formula has "kick us out" of that market and rightfully so. Until our Central bank is removed money printing will be with us along with resulting inflation. This period of deflation will not be with us forever. It could be longer than one would think possible. This will lull investors into the mentality of buying long dated bonds at sub atomic low levels. Great for a few years but as inflation returns interest rate will begin to climb dropping the bond's price.
Current (3-09-16) 10 year Treasury Rate 1.90%
Stocks as have reported by DYI are in bubble land our formula has "kick us out" of that market as well. Commodities due to deflation have been pounded down to give away prices. Please note it will take a few years for these companies to work their way back to solid footing and profitability. However, to repeat, this has placed share prices to amazingly low prices. Below is Vanguard's Precious Metals and Mining Fund symbol VGPMX.
Oil prices may have bottomed
The oil prices are down from say $100 to $30 and many energy related companies are going to go bankrupt. There is no question about that.
The whole Middle East is in kind of depreciation and the whole resource sector is badly affected, and the resource producing countries whether it is Brazil or South Africa or Russia, and suppose they all are suffering, so we had already some big-big cracks.
I believe it is conceivable that the oil price will stabilize here and not go down to $10, $20, because the same analysts who predicted when oil was at $100 that it would go do $150. They now say it will go down to $10, $20. So who knows.
Nobody knows exactly, but my sense is in the western world which includes western Europe, Japan that I count in the advanced economies and the US, we will have practically no growth for the next 5 to 10 years.
The governments are much too large as percentage of the economy and they are not spending on productive things like infrastructure or education, but they are spending on transfer payments. In other words, they take out your pocket and then give it to my pocket, better out of your pocket into my pocket.Continuing with Marc Faber
Precious metals, mining companies, Russia, Vietnam are possibly good investments.
I think there may be a rebound in oil and the sector that I think is the most attractive are basically precious metals and in this environment of money printing I think precious metals are part of a portfolio and the precious metal stocks, the mining companies they have declined something like 90% from the peak, they have now doubled from the lows but you understand you go down from a 100 to 10 and you go to 20, you can still go to 30, 40 so I think we are in the initial stages of a bull market for mining companies.
And then in terms of countries, some countries stock markets are quite inexpensive like Russia, they have some problems but I believe this year the sanctions of Western Europe towards Russia will come off and that things will actually stabilize in the Russian economy.
So I am not that bearish about Russian assets. And then as I told you relatively speaking, I think emerging economies are okay. Similar to India, I think, Vietnam is a more attractive country because there is a lot of foreign direct investments pouring into Vietnam from the US and also politically from Japan, South Korea, Taiwan and China.
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